Does Competition Destroy Ethical Behavior?
(2004)

This paper shows that conduct described as unethical and blamed on “greed” is sometimes a consequence of market competition. I illustrate this observation using examples of five censured activities: employment of children, corruption, excessive executive pay, corporate earnings manipulation, and involvement of universities in commercial activities. In all these examples, I show how competitive pressures lead to the spread of the censured behavior. My point is not to excuse or condemn any or all of these practices, but merely to pinpoint the crucial role of competition, as opposed to greed, in their spread. I focus here on ethics, not efficiency. The relationship between the two is complex. In many cases, ethical norms evolve to sustain cooperative behavior and thus to promote successful functioning of social institutions. For example, ethical condemnation of corruption is based on the idea that officials should not selfishly abuse public trust, and that a society functions better when its government works fairly. Likewise, the ethical norm against the employment of children is driven in part by the more general concern with abuse of the weak by the strong. When ethics promote social cooperation, ethical behavior and efficient behavior typically go together. In other instances, there is a mismatch between ethics and efficiency, either because ethical standards which might have had efficiency justifications long ago no longer do or because the behavior that is ethical in some idealized society makes matters worse in the real world. For example, the ethical norm against debt or interest, which might have been justifiable a millennium ago, is clearly no longer efficient. And while child labor might be a bad idea in a world with good access to capital markets and educational opportunities, for many families in the developing world the alternative to child labor is malnutrition and disease. These examples of a mismatch suggest that behavior condemned as unethical is not always inefficient. In still other instances, the conduct that is advertised as ethical is the result of political indoctrination by parochial interests or of simple confusion. For example, the ethical exhortations to “Buy American!” or to pay the “living wage” are underwritten by labor unions serving their members, not the public. In various times and places, tribalism, racism, anti-Semitism, the hatred of the rich, and other unsavory sentiments reflected the dominant ethic. In these instances, what is considered ethical is very far from what economists would consider efficient. In some of the examples I discuss below, a credible case can be made that the conduct perceived to be unethical is also inefficient; in other examples, there is more ambiguity. My interest, however, is not to evaluate efficiency, but only to bring the crucial role of competition into the explanation of why activities morally sanctioned by the society spread. In four of the examples I discuss, censured behavior reduces costs (in the last one, it raises revenues). I assume that the proprietor of the firm values ethical behavior, but that such behavior is a normal good. When sanctioned behavior by competitors reduces their costs, it also reduces prices in the market, and as a result the proprietor’s income falls. When his income falls, so does his own demand for ethical behavior, leading to the spread of censured practices. The analysis I present is closely related to the ideas in Gary Becker’s (1957) classic study of discrimination and reveals a broad range of circumstances where competition promotes censured conduct.